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Chapter 14 Pricing Strategies and Tactics Copyright © 2001 by McGraw-Hill Ryerson Limited Sommers Barnes Ninth Canadian Edition Presentation by Karen A.

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Presentation on theme: "Chapter 14 Pricing Strategies and Tactics Copyright © 2001 by McGraw-Hill Ryerson Limited Sommers Barnes Ninth Canadian Edition Presentation by Karen A."— Presentation transcript:

1 Chapter 14 Pricing Strategies and Tactics Copyright © 2001 by McGraw-Hill Ryerson Limited Sommers Barnes Ninth Canadian Edition Presentation by Karen A. Blotnicky Karen A. Blotnicky Mount Saint Vincent University, Halifax, NS

2 Copyright © 2001 McGraw-Hill Ryerson Limited 14 - 2 Chapter Goals To gain an understanding of: Price competition and value pricing Pricing strategies for market entry: skimming and penetration pricing Price discounts and allowances Geographic pricing strategies Special strategies including one-price, flexible-price, price lining, resale price maintenance, leader pricing, everyday low price, odd pricing Legal issues associated with pricing

3 Copyright © 2001 McGraw-Hill Ryerson Limited 14 - 3 Pricing Strategy how does a company decide what price to charge for its products and services? what is the price anyway? doesnt price vary across situations and over time? some firms have to decide what to charge different customers and in different situations they must decide whether discounts are to be offered, to whom, when, and for what reason

4 Copyright © 2001 McGraw-Hill Ryerson Limited 14 - 4 Price vs. Nonprice Competition price competition,In price competition, a seller regularly offers products priced as low as possible and accompanied by a minimum of services. nonprice competitionIn nonprice competition, a seller has stable prices and stresses other aspects of marketing. value pricingWith value pricing, firms strive for more benefits at lower costs to consumer. relationship pricing,With relationship pricing, customers have incentives to be loyal-- get price incentive if you do more business with one firm.

5 Copyright © 2001 McGraw-Hill Ryerson Limited 14 - 5 Nonprice Competition some firms feel price is the main competitive tool, that customers always want low prices other firms are looking for ways to add value, thereby being able to avoid low prices sometimes prices have to be changed in response to competitive actions nonprice competitionmany firms would prefer to engage in nonprice competition by building brand equity and relationships with customers

6 Copyright © 2001 McGraw-Hill Ryerson Limited 14 - 6 Relationship Pricing Uses price as a method to build long-term relationships with the best customers Focuses on giving better deals to better customers Goal is to price relative to the value of the customer to the firm, while building loyalty and stimulating repeat buying

7 Copyright © 2001 McGraw-Hill Ryerson Limited 14 - 7 The Price Determination Process In pricing, an organization first must decide on its pricing goal. The next step is to set the base price for a product. The final step involves designing pricing strategies that are compatible with the rest of the marketing mix. Many strategic questions must be answered: Will our company compete on the basis of price or other factors? What kind of discount schedule (if any) should be adopted?

8 Copyright © 2001 McGraw-Hill Ryerson Limited 14 - 8 SELECT PRICING OBJECTIVE SELECT METHOD OF DETERMINING THE BASE PRICE: Cost-plus pricing Price based on both demand and costs Price set in relation to market alone DESIGN APPROPRIATE STRATEGIES: Price vs. nonprice competition Skimming vs. penetration Discounts and allowances Freight payments One price vs. flexible price Psychological pricing Leader pricing Everyday low vs. high-low pricing Resale price maintenance The Process: An Illustration

9 Copyright © 2001 McGraw-Hill Ryerson Limited 14 - 9 Market Entry Pricing Strategies Market-Skimming PricingMarket-Skimming Pricing: Setting a high initial price for a new product. Works if product is new, distinctive and desired Early in Product Life Cycle, when demand inelastic Protected by entry barriers, e.g. patents Market-Penetration PricingMarket-Penetration Pricing : Setting a low initial price for a new product. Works if large market, elastic demand Economies of scale are possible Fierce competition

10 Copyright © 2001 McGraw-Hill Ryerson Limited 14 - 10 Discounts and Allowances Quantity discount: Quantity discount: The more you buy, the cheaper it becomes-- cumulative and non-cumulative. Trade discounts : Trade discounts : Reductions from list for functions performed-- storage, promotion. Cash discount : Cash discount : A deduction granted to buyers for paying their bills within a specified period of time, (after first deducting trade and quantity discounts from the base price)

11 Copyright © 2001 McGraw-Hill Ryerson Limited 14 - 11 3/10, NET 30 1/7, NET 30 Percentage to be deducted if bill is paid within specified time Percentage to be deducted if bill is paid within specified time Number of days from date of invoice in which bill must be paid to receive cash discount Number of days from date of invoice in which bill must be paid to receive cash discount Number of days from date of invoice after which bill is overdue Number of days from date of invoice after which bill is overdue Calculating a Cash Discount

12 Copyright © 2001 McGraw-Hill Ryerson Limited 14 - 12 Other Discounts and Allowances Seasonal Discounts Forward Dating Promotional Allowances

13 Copyright © 2001 McGraw-Hill Ryerson Limited 14 - 13 The Competition Act Predatory pricing: Predatory pricing: Selling at unreasonably low prices to lessen competition. Price discrimination: Price discrimination: The use of different prices for different customers. It is illegal if a price advantage is granted to one, but not another, where both compete and the articles are similar. Granting promotional allowances must be done on a proportionate basis to all customers.

14 Copyright © 2001 McGraw-Hill Ryerson Limited 14 - 14 Geographic Pricing Strategies F.O.B. Point-of-Production pricing:F.O.B. Point-of-Production pricing: Price quoted at factory-- buyer pays transportation. Uniform delivered pricing:Uniform delivered pricing: Same delivered price quoted to all; works if transportation costs small. Zone-delivered pricing:Zone-delivered pricing: Set same price within several zones, e.g. Maritimes, Quebec. Freight-absorption pricing: Freight-absorption pricing: Seller absorbs transport cost to penetrate market.

15 Copyright © 2001 McGraw-Hill Ryerson Limited 14 - 15 Special Pricing Strategies one-price strategyfirms may adopt a one-price strategy or charge different prices to different customers flexible pricing strategies:flexible pricing strategies: shoppers may pay different prices if they buy the same quantity

16 Copyright © 2001 McGraw-Hill Ryerson Limited 14 - 16 Psychology of Pricing psychologythe psychology of pricing suggests that price will convey a message about the product or service being sold leader pricing bait pricing prestige pricing price liningprice lining involves setting prices at a small number of fixed levels within a retail store odd pricingodd pricing is often used to suggest a bargain, while even pricing is used more in prestige, fashion stores

17 Copyright © 2001 McGraw-Hill Ryerson Limited 14 - 17 Questionable Pricing Practices resale price maintenanceresale price maintenance involves a supplier requiring that intermediaries sell a product at a certain price: illegal in Canada, firms are allowed to specify a suggested retail price loss-leadersome firms reduce prices, possibly even below cost, to attract customers; this form of loss-leader pricing is not illegal unless it persists for a long time with the goal of eliminating competition (predatory pricing)

18 Copyright © 2001 McGraw-Hill Ryerson Limited 14 - 18 EDLP pricing In EDLP pricing, a retailer charges a constant, low price with no temporary discounts. For example: Wal-Mart, Price Club, and Saturn. high-low pricing In high-low pricing, a retailer charges higher prices but then runs frequent promotions in which prices are temporarily lowered. Everyday Low Price (EDLP) vs. High/Low Pricing


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